2. P Corporation was formed in 1981 by its two equal shareholders, Nancy and Opal, and elected S corporation status at the beginning of the current year. On January 1, Nancy had a $1,000 basis in her P stock and Opal had a $5,000 basis in her stock. P has $6,000 of AEP from its prior C corporation operations and has the following results from operations this year:

Gross Income $32,000

LTCG 4,000

Salary Expense 18,000

Depreciation 8,000

What are the tax consequences to Nancy, Opal and P Corporation in the following alternative situations?

(a) On November 1, P distributes $5,000 to Nancy and $5,000 to Opal.

(b) Same as (a), above, except that P distributes $10,000 to Nancy and $10,000 to Opal.

(c) What difference would it make in (a), above, if P also received $4,000 of tax-exempt interest during the year and distributed $2,000 of the interest to Nancy and $2,000 to Opal?

(d) During the current year P makes no distributions. On January 1 of next year Nancy sells her P stock to Rose for $6,000. If P breaks even on its operations next year, what will be the result to Rose if P distributes $6,000 to each of its shareholders next February 15?

(e) During the current year P makes no distributions. Nancy and Opal revoke P's Subchapter S election effective January 1 of next year. Assume P Co. has $5,000 of earnings and profits next year. What results to Nancy and Opal if P distributes $7,000 to each of them on August 1 of next year?